A year has passed since BNP Paribas Real Estate Ireland partnered with S&P Global to compile the Ireland Construction Purchasing Managers’ Index (PMI).
The PMI provides real-time information on the dynamics of the construction industry closest, unfiltered and straight from the mouth of the practitioner. However, a feature of high-frequency indicators is that temporary “noise” can distract from longer-term trends. So, as the end of the year approaches, it’s time to reflect on the dominant themes of 2022.
The PMI measures the change in overall activity by asking construction firms whether they are busier, busier or the same as last month. The resulting score is simply the percentage of companies that were more active plus half the percentage of those whose activity stayed the same. Any score above 50 means the proportion of builders are more busy than less busy.
The average monthly score for 2022 was 50.2. Therefore, throughout the year, the sector saw a similar level of activity as 2021. However, 2022 was a year with two halves. Between January and May, the majority of companies reported increasing activity.
But a rising proportion of construction companies said they were less busy during the year and the overall activity indicator has been below 50 for five of the past six months. This has been repeated across the eurozone, with PMI data now showing the fastest construction slowdown in two and a half show years.
Paradoxically, commercial and residential property completions in Ireland have continued to rise strongly even as construction activity has slowed. On the commercial side, around 220,000m² of office space will be completed in Dublin this year, making 2022 the strongest year since 2008. A similar amount of storage space is being delivered, more than doubling 2021’s completions.
Commercial and residential property completions have continued to rise strongly in Ireland
Meanwhile, almost 21,000 new homes were completed across Ireland in the first three quarters and for the full year it is expected to be around 28,000; an increase of a good third compared to 2021.
The explanation for this paradox is that new project starts are gradually dwindling, leading to a decline in early-stage activity. However, projects that have been underway for some time will be completed. The overall effect is an increase in real-time deals but a gradual weakening of overall activity levels.
We believe there is enough work underway to keep 2023 office, logistics and housing completions broadly at this year’s levels. However, PMI data shows that construction companies have faced a steadily declining order intake over the past eight months. Consistent with this, brokers are reporting a slowdown in starts, while starts are down 14 percent.
In industries like offices, where the pipeline should be sufficient to meet medium-term needs, this isn’t necessarily an issue. However, strong population growth makes the slowdown in housing starts a concern for the housing supply in 2024.
The withdrawal at the beginning of a project is easy to understand. Before going site, rational developers must believe they can sell their completed properties for more than the cost of construction.
The expected scope for development is currently narrowing on both sides. Home price inflation has slowed from 15.1 percent per year to less than 11 percent now and is on a declining trend.
Meanwhile, commercial property values fell slightly in the third quarter as rate hikes took hold. In contrast, building materials prices are increasing at over 16 percent a year, and our PMI data shows that for the past two and a half years, home builders have faced consistent monthly cost increases.
Looking ahead, the PMI offers insight into how 2023 is headed. Construction was Ireland’s hottest job market in 2022, with almost 25,000 net jobs created – a 16.9 per cent increase on the previous year. But our PMI data shows recruitment has now stalled.
At the same time, companies on the PMI panel have trimmed intermediate spending and say they are destocking. These factors suggest that the sector is adjusting to current market conditions rather than preparing for further expansion.
Government initiatives like the First Home Scheme and the upcoming easing of mortgage regulations should support development margins by making it easier for homebuilders to sell homes at higher prices
This caution may continue amid challenging broader economic conditions – PMI data for the combined manufacturing and services sector in November signaled a fall in manufacturing for the first time in 21 months.
Critically, however, there are no signs of a collapse. As noted above, a strong pipeline will keep builders busy in 2023 as pricing and supply pressures begin to unwind from the extremes of the last two years.
In addition, government initiatives such as the First Home Scheme and upcoming easing of mortgage regulations should support development margins by making it easier for homebuilders to sell homes at higher prices. Land prices are also reported to be adjusting downwards, which should also support development over the longer term.
Reflecting this, operators have stopped shedding labor and a slim majority of PMI panellists still expect to have more jobs a year from now.
John McCartney is Director of Research at BNP Paribas Real Estate Ireland.
Andrew Harker is an economics director at S&P Global.
https://www.independent.ie/business/construction-added-25000-jobs-this-year-but-that-growth-has-now-stalled-42220162.html The construction sector added 25,000 jobs this year, but that growth has now stalled